What is digital pricing?
Digital pricing sets prices for products and services using real-time digital tools and techniques. Using algorithms and automatization, prices are selected based on the current market conditions.
Definition of digital pricing
Digital pricing is a process in which companies use digital tools and techniques to reshape their pricing strategies. This can range from building new pricing models to enforcing automated pricing systems. The ultimate goal of digital pricing is to improve business performance through more efficient and adequate pricing.
Digitizing pricing can offer numerous benefits, including increased accuracy, transparency, and speed. In addition, digital tools can help companies better understand customer needs and behaviors and enable more customized pricing.
Companies should consider digital pricing as it can help them tailor their pricing strategy to their specific goals and needs. Some digital pricing tips that all companies should consider are:
- Use data analytics to inform your decisions: Gather data about your customers, products, and market conditions to make more informed pricing decisions.
- Be transparent: ensure your prices are straightforward and easy to understand, so customers know what they are paying for.
- Try different digital pricing strategies and find what works best for your business. Review your pricing regularly and adjust as needed.
If you need help implementing digital pricing into your business, don’t hesitate to get in touch with us! We have worked on numerous highly-complex projects and we never shy away from an exciting challenge!
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How technology is changing the pricing process
Technology with A.I. is adjusting the way companies price their products and services. In the past, companies relied on manual processes for pricing. However, thanks to digital technologies, companies can automate pricing by leveraging data analytics and pricing models integrated with sales tools such as CRM and price quote generation (CPQ) software.
This allows companies to approach pricing more strategically and better understand the impact of pricing on the bottom line.
Digitizing existing pricing processes
Today, digital technology is rapidly changing how businesses operate, and pricing processes are no exception. Many companies use digital solutions to streamline their pricing processes and increase efficiency.
Digital pricing solutions offer many advantages over traditional methods. They can help reduce costs, speed up decision-making and improve accuracy. In addition, digital solutions provide greater flexibility and transparency, which can boost customer confidence.
Choosing the right digital pricing solution for your business requires understanding your needs and goals. Here are some factors you should consider:
- Cost: How much are clients willing to spend on a pricing solution?
- Ease of use: How easy to understand is the solution to use and implement?
- Features: What features are essential to clients and their businesses?
- Flexibility: How flexible does the solution need to be to meet your changing needs?
- Support: What level of support does the merchant provide?
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Digital pricing models
Companies can choose from several digital pricing models, each with its own advantages and disadvantages.
The most common digital pricing models are:
- tiered
- pay-per-use
- subscription
- freemium:
Tiered pricing is standard among SaaS companies. Different features are offered at different prices depending on the level of service desired. Additional features are unlocked when the user pays more
With usage-based pricing, customers are charged for each digital product or service they use.
With digital subscriptions, customers pay a monthly or annual fee to access a digital product or service.
With digital freemium pricing, customers can access a digital product or service for free but must pay for additional features or content.
A typical online fashion retailer has an assortment of seven million items, while the big multi-category providers like Amazon have many more. Moreover, the most successful online retailers change their prices on individual items every 15 minutes. How is that possible?
Suppose you’re trying to figure out how many employees have to work tirelessly in their offices to analyze price elasticity trends and how they affect individual prices. In that case, you’re barking up the wrong tree.
Dynamic pricing is fully automated, with computers calculating and processing vast amounts of data about competitors’ prices, sales promotion figures, potential customers’ search trends, product reviews on Internet forums, and even comments on Twitter and Facebook. Depending on the company’s strategic goals, be it maximizing market share or profit, an algorithm calculates the optimal price on demand, sometimes updating every minute.
Dynamic pricing is critical in improving both consumer price perception and retailer profitability. Dynamic pricing, introduced by Amazon and others in 2005, is saving online retailers’ profit margins as online shoppers have become savvy bargain hunters.
Price comparison websites and review communities have enabled unprecedented transparency, and aggressive new retailers often blow up existing pricing structures with low introductory offers. Dynamic pricing can quickly generate a 3 to 8 percent return on sales and represents a tremendous competitive advantage.
Retailers counter with two different versions of dynamic pricing: one version optimizes prices for an entire assortment, which then applies to all customers. This is ideal for products that are easy to compare, such as branded items. The second version calculates an individual price for each customer. This works better when direct comparisons, such as for insurance products or travel.
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Algorithms find the best prices
Fortunately for retailers, the best price is sometimes cheaper than competitors’. As local retail experiences also show, customers form opinions about whether a store offers good value for money or is expensive Digitization is disrupting the traditional ground rules of retail pricing based on relatively few prices for specific products.
In supermarkets, for example, prices on frequently purchased items such as milk, butter, and laundry detergent are usually marked up, so retailers select these products for their aggressive special offers.
And it’s no different online. It comes down to knowing the products that customers base their opinions on value for money. The best example, once again, is Amazon: The e-commerce giant defines essential value items in each category that it consistently offers at lower prices than its major competitors. For example, in ink cartridges for printers, Amazon knows that most shoppers look first at the price of a double pack of black ink.
In 2016, Amazon undercut its two strongest competitors by more than 20 percent on this product. However, Amazon was slightly below its competitors on the single pack of black ink, which is also frequently purchased. However, these low prices are more than made up for by the prices of colored ink: yellow, blue, and red ink are between 33 percent and 57 percent more expensive than Amazon’s competitors.
The great thing about digital pricing is that the company is constantly learning.
Computer programs track customer and competitor reactions to a new price in real time: are sales developing as planned? How many prospects did not buy? Where do the new customers come from price comparison sites, competitors’ websites – or did they come to our website specifically?
All findings are immediately incorporated into the pricing model, which is constantly updated and adjusted.
Companies that optimize their prices according to this formula even do away with the old 80/20 rule, of which 20 percent of products account for 80 percent of sales and profits.
Let us take the example of Amazon with its cell phones: About 80 percent of its revenue comes from selling devices, which account for about 20 percent of the business in that category. Accessories such as chargers, connector cables, headphones, and smartphone cases account for the remaining 80 percent. Although they account for only 20 percent of sales, they contribute 50 percent of profits.
These are typical long-tail products. They remain in the range for years, even if the corresponding cell phone has long since been superseded by newer models but is still used. Stocking such an extensive range of accessories in stationary retail is not profitable because the storage space is too expensive.
Online retailers, however, with their vast and inexpensive warehouses, can healthily increase their profit margins with just these items.
All major online retailers have now introduced dynamic pricing systems, and the idea is also catching on in brick-and-mortar retail. For example, U.S. retail chains Sears and Home Depot can directly change their in-store prices at the touch of a button after installing electronic price tags in some departments of their stores.
Once electronic pricing becomes widespread, opportunities for dynamic pricing will also open up for multichannel retailers that started in the physical space. After all, today’s customers expect a consistent offering across all channels, including prices.
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Customized pricing
Customized pricing goes one step further.
Here, the retailer tries to classify individual customers by analyzing, for example, which device they use to access the website. If an expensive iPad is used, the system will immediately display a higher price than for another customer using a cheaper product with an Android operating system. A more reasonable offer is also displayed to customers who were redirected to the vendor’s website from a price comparison site.
For a long time, systems had remembered whether someone had visited the website before and was interested in an offer. If the customer looks at the same item on the website again, the system forces a decision by promising a discount for immediate purchase or offering free additional services.
When customers see through these pricing strategies, they often need to be more enthusiastic, which is why many travel companies have given up on differentiating customers by the devices they use. Too many customers have expressed frustration at being shown a higher price after glancing at their expensive iPhone than they were later shown at home on their old PC. However, price differentiation by route to the website is still very much in place among the leading players in the travel industry.
The concept of customized pricing is of interest to companies in many industries. Insurers are working on better pricing individual risks, while energy companies are looking to incorporate personal consumption habits into their offerings. And it’s not just in retail that dynamic pricing is catching on; companies are also experimenting with the concept, for example, in the chemical and steel industries.
Steel trader Baosteel’s online marketplace Ouyeel has created price transparency not previously seen in the industry. And BASF now trades on the Chinese trading platform Alibaba, selling chemicals to thousands of primarily mid-sized customers in Asia.
Five modules of dynamic pricing
Dynamic pricing is critical in improving both consumer price perception and retailer profitability. A robust dynamic pricing solution should consist of five modules, all working in parallel to generate price recommendations for each SKU in the assortment:
- The Long-Tail module helps retailers set the introductory price for new or long-tail items through intelligent product matching. The module determines which data-rich products are comparable to new things (with no history) or long-tail items (with limited historical data).
- The Elasticity module uses Big Data analytics and time-series methods to calculate how a product’s price affects demand, taking into account various factors.
- The Key Value Items (KVIs) module estimates how each product affects consumers’ price perceptions using actual market data rather than consumer surveys. This allows the module to identify which items consumers perceive as KVIs automatically.
- The competitive module recommends price adjustments based on competitors’ prices updated in real-time.
- The omnichannel module coordinates prices between the retailer’s offline and online channels.
Although a best-in-class solution includes all five modules, companies can often start with just the KVI and Competitive Response modules. These help companies respond quickly to competitive changes on key items while adding the other modules.
Companies that want to lay the groundwork for a functioning dynamic pricing system know that it can be done – and that the effort is worth it. Some e-commerce retailers have increased their margins by two to three percentage points – in an industry where margins are tight. This can make the difference between an industry leader and a follower.
And with results like that, concepts catch on quickly. Over the next few years, dynamic pricing will likely become a core business competency. The next wave will affect the B2B sector, where pricing still needs to be transparent in many industries. This new openness could send shock waves. Just think of the current practices in industries such as steel or chemicals. In the B2C sector, the trend is increasingly toward customized offers, including tailored prices.
The big question is whether customers will rebel. Just because something is technically feasible does not mean it will be accepted, as the example from the travel industry shows, where companies have had to abandon price differentiation depending on whether a customer uses an expensive Apple product or a cheap no-name device PC.
But there are other ways of setting prices that will pose an exciting challenge for creative companies.
If you have need to build a dynamic digital pricing system, please drop us an email at info@lumenspei.com our reach out to us via our contact form! 🙂
